Startups and the Law: The Legal Issues that Can Shape the Trajectory of Tech Startups

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June 17, 2019

By, Derrick L. Maultsby Jr., and Jason L. Ott, Esq., Dickey McCamey

It can be extremely difficult for companies to navigate the legal requirements associated with conducting business on a daily basis. While large companies are staffed with in-house counsel to deal with the legal implications of their operations, smaller companies are not always fiscally able to employ such help. Specifically, tech startups often can struggle in that regard.

While some startups are able to overcome having no legal counsel early in their development, many startups can experience significant negative consequences without legal direction and advisement at that stage, potentially resulting in stunted growth or ceasing operations altogether. Some common legal obstacles facing startups are the following:

Corporate Formation and Governance

From the outset, a startup has substantial legal challenges, concerning which many of its founders likely are not aware. Deciding which legal entity to choose is vital as a first step into the business venture. Choosing the wrong legal entity can have potentially devastating consequences as it seeks to develop and grow. Further, having an understanding of the regulations and laws that govern a company’s business and industry is imperative to carry on compliant, responsible business practices. A misstep in this early decision making process and associated corporate legal compliance can significantly limit a startup’s business opportunities and development.

Ownership of Intellectual Property

Most startups offer customers innovative services and products. Those services and products are the intellectual property that the startup owns. Much (if not all) of the value of a startup lies in that intellectual property. Thus, protecting that value is of the utmost importance. To do so, startups must take active steps, including entering into written contracts with anyone to whom they might plan to disclose such intellectual property, applying for patent, trademark, or copyright protection, drafting employment contracts with an eye toward intellectual property protection, and safeguarding their intellectual property with strong access control.

Contracts and Commercial Transactions

Drafting and reviewing contracts can be mundane, but failing to complete those tasks comprehensively from a legal perspective can have drastic consequences. By entering into a contract, of course, any business is legally binding itself to the terms of that contract. It is imperative throughout the contract negotiation, drafting, and agreement stages that a startup completely understands the implications of the provisions and language in that contract and what those provisions might mean from a business/technological development standpoint moving forward.

General Compliance

Tech startups are leaders in innovation that help pre-existing industries and businesses to evolve. When operating within these various spaces, there are various commercial, governmental, environmental and other regulations that may come into play. Startups must be familiar with all applicable regulations so that they can ensure compliance within all such legal requirements. Further with a constantly growing and evolving technological landscape, legal regulations concerning tech companies specifically are always proliferating. That proliferation requires consistent research and updates on new and developing relevant laws and regulations for corporate compliance on a daily basis and far into the future.

Takeaways

While we summarized a few of the legal challenges that tech startups face, there are a wide range of additional issues that may confront them. It is important that smaller tech companies and tech startups seek out the legal counsel that they need. While it may not be feasible to hire in-house legal counsel, there are other options available for guidance. In connection with that, our firm is interested to collaborate with tech startups and similarly situated companies early in the developmental stages of those businesses to provide guidance on these extremely important topics, with the intentions both of helping the Pittsburgh tech community to continue to develop and thrive and of establishing longstanding business relationships with those future clients.